U.S. Budget Deficit Was Smaller Than Predicted in October

The U.S. government started the new fiscal year on the right foot, posting a substantially lower than forecast $140.4 billion deficit in October, the first month of the new fiscal year.

Economists surveyed by Bloomberg had predicted October's budget deficit would total $148 billion after a $34.6 billion deficit in September, the last month of fiscal 2010, which was slightly higher than the initially estimated $34.5 billion September deficit. The deficit totaled $90.5 billion in August. In October 2009, the deficit totaled $176.4 billion. The federal government's fiscal year runs from Oct. 1 to Sept. 30.
Little Impact On Markets

October's budget deficit report had little impact Wednesday on the market for Treasuries, with the 10-year note virtually unchanged at 2.73%. The low rate indicates that despite the high national debt, institutional investors -- from pension funds to foreign governments -- remain confident that the world's largest and most technologically advanced economy will be able to service its deficit.

U.S. stock markets were virtually unchanged by the deficit announcement, at least initially. The Dow Jones Industrial Average, down about 15 points before the announcement, traded up about 1 point to 11,348 in the initial minutes afterward.

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The Congressional Budget Office has forecast a $1.06 trillion deficit for fiscal 2011, which is about 7% of U.S. gross domestic product. The federal government posted a $1.29 trillion deficit for fiscal 2010, and a record $1.42 trillion deficit in fiscal 2009.

In October, revenue rose 7.9% to $145.9 billion from $135.3 billion in October 2009. That's a substantial increase, but it's lower than the 12% year-over-year revenue increase recorded in September. That's the third consecutive month that the rate of revenue growth has slowed, and should that slowdown continue, it would suggest the U.S. economic recovery is losing stream.

Individual income taxes rose 17% to $71.4 billion, while corporate income taxes were a negative $4.4 billion.

Historically, government revenue from income taxes and corporate taxes increase in an economic expansion, as more Americans find jobs, and corporate revenue rises with higher sales.

October spending fell 8.8% to $286.4 billion from $311.7 billion in September 2009. Economists expect federal spending to continue to decline as outlays for the TARP, related financial system support, and fiscal stimulus decrease.

U.S. Fiscal Condition: Small, Steady Progress

October's Treasury report continues to show a modestly improving budget picture -- one that reflects a slowly recovering U.S. economy. Tax receipts continue to rise at a rate consistent with an ongoing expansion, and higher international sales by U.S. corporations will likely boost their revenue and earnings, increasing net tax payments to the Treasury, even if commercial activity in the domestic economy remains lukewarm.

With government spending starting to normalize as both bailout and stimulus spending wane, the biggest budget hurdle may prove to be a political one. The Congress must pass a budget for the new fiscal year, which began September 30. As of now, the federal government is operating on a temporary budget, known as a continuing resolution, which keeps most government departments on the previous year's budget. The continuing resolution expires December 3. Without an extension, or a passed budget for fiscal 2011, the U.S. government could shut down.

Typically, lawmakers would simply pass another continuing resolution until the formal fiscal 2011 budget is passed, but the Republican Party regained control of the U.S. House of Representatives and it argues the large budget deficit is due to too much government spending, not a lack of revenue.

That latter view is likely to be opposed by both President Obama and congressional Democrats, who still control the Senate -- potentially setting the stage for the first fiscal showdown in the nation's latest era of divided government.